 "Avoid rejection despite a low credit score")
Has your home loan application been rejected by your bank? Are you annoyed because you don't know the reason for the rejection? You have never defaulted on any loan repayment, you have always paid your bills on time, and you have submitted all relevant documents. Later, much to your surprise, you find out that your application was rejected because of a low credit score.
For the uninitiated, a credit score, computed by credit information companies like CIBIL, Experian or Equifax, indicates your credit worthiness to a lender. While a retail banking customer with a high credit score does not get the benefit of a low interest rate, banks will neither lend high amounts to you nor will you be able to switch lenders to take advantage of a rate cut if you have a poor credit score.
Typically, banks consider a score of 750 and higher as decent for advancing a loan. According to CIBIL, the credit score is calculated after taking into account defaults by an individual, amount of credit used, number of loan applications, etc. Simply put, default on repayment is just one of the factors that determine your credit score. But it gets the maximum weightage of 35 per cent.
What should you do if you don't have a good credit score? Here are tips on how to negotiate the best deal even if you have a score below 750.
Where to begin
Credit score is only one of the many parameters lenders use before deciding to give a loan to an individual. "It won't be entirely correct to say that someone with a lower credit score cannot avail loans. Such individuals can avail secured loans like a home loan at a higher rate of interest-usually about two-three percentage points higher. The same goes for unsecured loans as well," says Naveen Kukreja, CEO and co-founder, Paisabazaar.com. You may have to pay 12-13 per cent as interest rather than the usual 9.25-9.5 per cent for a home loan. "Besides a credit default, if a person doesn't have a stable income and is self-employed, the interest rate can go up to 19 per cent and you will have to approach an NBFC," says Ranjit Punja, founder, Credit Mantri.
Besides having to pay a higher interest rate, lenders could also offer a lower loan-to-value (LTV) ratio if your score is below 750. "While someone with a high score (750-plus) can get 80-90 per cent of the value of the house as loan, a low score (below 600) would probably fetch you only 65 per cent of the value of the property as loan," says Kukreja.
If your score is low because of an inadequate credit track record, that is, you have not taken too many loans in the past or your credit history is relatively recent, you may still get a loan without much hassle.
How to negotiate
Some lenders, usually banks, don't entertain customers whose credit score is below 700. Hence making multiple enquiries can be futile. Doing so will, in fact, worsen your case. Every time you make a loan enquiry, lenders will pull out your credit report where all the enquiries you made would show up. Too many enquiries within a short period of time can have a negative impact on your score and will also make lenders sceptical.
If you have a savings or salary account with a bank, the latter could listen to you after seeing your transaction history. It helps if the payment that you defaulted on is at least 24 months old and you are applying for a secured loan. Some banks prefer existing customers for an unsecured loan, such as a personal loan. If your relationship with your bank has been healthy, that will help your case.
Some other lenders, especially NBFCs, target the segment that mainstream banks won't work with. Hence you have a better chance of striking a deal with them.
If the reason for your low score is a default, there are lenders who will be ready to listen to your side of the story before rejecting your application. They may agree to give you a loan if you defaulted in the past because you lost your job, or because you had to undergo emergency hospitalisation and were forced to borrow and then couldn't repay.
"If you have a genuine reason for defaulting on the payment, lenders are sometimes willing to overlook the low credit score and offer you a loan, though it may not be at the best of terms," says Punja.
However, make sure that all your other credentials are in order. "You should have a stable job in a top-rated company. You should also keep all your Income Tax return documents in order. Lender may also prefer a candidate who has been living at his current residence for at least two years," says Punja.
What can you do?
If nothing else works, you can use your assets, if you have any, as collateral to get a higher LTV and lower interest rate. Fixed deposits, an idle property or gold are some assets that are accepted as collateral.
Avoid using insurance policies unless you have a decent sized cover. If the size of the cover is small, you will not get an adequate amount as loan. Moreover, do not borrow against shares because any drop in share price will have to be compensated by you.
Typically, non-banking financial Institutions (NBFCs) are more flexible with credit scores. "NBFCs have disbursed loans for a credit score as low as 400," says Kukreja. But they also charge higher interest rates than banks.
